BCI's Record $7 Billion Real Estate Partnership?
The British Columbia Investment Management Corporation (BCI) will move over 40 Canadian real estate assets into a $7-billion fund in partnership with RBC Global Asset Management Inc. and Quadreal Property Group. The partnership, according to RBC’s Michael Kitt, is the largest CRE transaction in Canadian history.BCI put ot a press release on this partnership stating this:
RBC GAM considers small and mid-level pension funds and other institutional investors its key target market for the fund, which will launch during Q3 2019.
“(Investors) know that here’s a $7-billion diversified core real estate portfolio that I believe is Canada’s largest real estate transaction ever,” Kitt told RENX in an interview following Tuesday’s announcement. He said BCI retaining a 50 per cent interest in each of the assets is a critical aspect of the partnership.
“(Investors) know that BCI will care about the performance, they will care about long-term decision-making and the long-term future of how the partnership and the fund will grow,” he said. “That’s what makes it unique.”
The partners are: RBC GAM, Canada’s largest fund manager and one of the largest managers of Canadian pension assets; BCI, a global investment manager and one of Canada’s largest pension plan managers; and real estate service providers and developer QuadReal, established by BCI to expand and manage its portfolio.
Institutional investors will be able access the portfolio through the RBC Canadian Core Real Estate Fund, which will be established and managed by RBC GAM. It is expected to be open for investment in the third quarter of 2019. Investment will take place in four tranches through 2022 and RBC GAM will become a 50-50 partner in the properties.
About the portfolio
Kitt said the portfolio will include a diverse mix of assets from the office, industrial, retail and residential sectors, with about half of the total properties being office. He said it is focused exclusively in eight of Canada’s largest cities, with about 60 to 70 per cent of the properties in Toronto and Vancouver.
“We love the industrial and residential sectors today,” he said. “They form a significant component of this portfolio. But, so does every other investor love those.
“The retail . . . we’ve got a nice mix of enclosed and open-air,” Kitt added. “We’ve really attempted to diversify the portfolio across asset class, cities and the locations within those cities to make sure we are not making any large, specific bet. We’ve really stayed away from taking development exposure, this is a well-leased, income-producing portfolio.”
Among the properties which will be included in the fund are:
* PwC Tower in Toronto, part of BCI’s Southcore Financial Centre office development;
* Marche Central shopping centre in Montreal;
* 745 Thurlow in Vancouver;
* Bayview at Cole Harbour multi-residential development in Vancouver;
* and several industrial properties in north Mississauga (just north of Toronto).
BCI diversifying internationally
From BCI’s perspective, the initiative supports its objective to internationally diversify its real estate portfolio while maintaining a strong domestic core. QuadReal will continue to manage the properties on behalf of BCI and the fund.
“Over many years, we have diligently acquired and developed a portfolio of premium Canadian properties on behalf of our pension and accident fund clients,” said Gordon J. Fyfe, CEO and CIO of BCI, in the Tuesday release.
“BCI’s real estate portfolio now exceeds $27 billion in value and as we diversify into global markets, its Canadian core will always be the foundation of our clients’ portfolio. The opportunity to partner with a like-minded, long-term focused institution such as RBC Global Asset Management is extremely compelling.”
The most recent statistic available on BCI’s website show its total real estate portfolio was comprised of about 43 per cent office, 27 per cent residential, 15 per cent retail and 14 per cent industrial holdings, in addition to a small amount of hospitality assets.
The agreement is subject to the completion of definitive agreements and certain conditions including capital commitments to the strategy.
The RBC Canadian Core Real Estate Fund will initially be open to institutional and other qualified investors. RBC GAM is actively exploring opportunities to bring the fund and related strategies to market to serve the needs of other client segments including individual accredited investors and advisors.
About RBC Global Asset Management
RBC Global Asset Management is the asset management division of Royal Bank of Canada and includes institutional money managers BlueBay Asset Management and Phillips, Hager & North Investment Management.
RBC GAM is a provider of global investment management services and solutions to institutional, high-net-worth and individual investors through separate accounts, pooled funds, mutual funds, hedge funds, exchange-traded funds and specialty investment strategies. The RBC GAM group of companies manages approximately $425 billion in assets and has approximately 1,400 employees across Canada, the United States, Europe and Asia.
About BCI
With $145.6 billion of managed assets, British Columbia Investment Management Corporation is a leading provider of investment management services to British Columbia’s public sector. It offers investment options across a range of asset classes: fixed-income; mortgages; public and private equity; real estate; infrastructure; and renewable resources.
About QuadReal
Headquartered in Vancouver, QuadReal Property Group is a global real estate investment, operating and development company. The company’s $27.4-billion portfolio spans 23 cities across 17 countries.
QuadReal was established to manage the real estate program of BCI, one of Canada’s largest asset managers with a $145.6 billion portfolio.
QuadReal aims to deliver prudent growth and strong investment returns, and to create and sustain environments that bring value to the people and communities it serves.
RBC Global Asset Management Inc. (RBC GAM) today announced an agreement with British Columbia Investment Management Corporation (BCI) and QuadReal Property Group (QuadReal) to make one of Canada’s most diversified commercial real estate portfolios available to institutional investors.This is a huge deal for BCI and its real estate subsidiary, QuadReal, and a good deal for RBC GAM and its smaller and mid-sized pension clients.
This venture will combine the strength and expertise of three market leaders:
This initiative will create a portfolio of over 40 of BCI’s existing Canadian real estate assets, with a total value in excess of $7 billion. Institutional investors may participate by investing in an income-producing Canadian commercial real estate strategy through the RBC Canadian Core Real Estate Fund (“the Fund”). The Fund will be established and managed by RBC GAM and is expected to be open for investment in the third quarter of 2019. The Fund will aim to deliver an attractive income stream and total returns with limited volatility, along with inflation protection and low correlation to other asset classes.
- RBC GAM, Canada’s largest fund manager and one of the largest managers of Canadian pension assets1 through its Canadian institutional business, PH&N Investment Management;
- BCI, a global investment manager and one of Canada’s largest pension plan managers; and
- QuadReal, one of Canada’s most respected real estate service providers and developers, established by BCI to expand and manage its global real estate portfolio.
The Fund is expected to become an equal owner with BCI in all of the portfolio’s properties through a multi-stage vend-in process. The initiative supports BCI’s objective to internationally diversify its real estate portfolio while maintaining a strong domestic core. QuadReal will continue to manage the properties on behalf of BCI and the Fund, ensuring a seamless continuity of management and a disciplined focus on asset level performance.
“Institutional clients are increasingly looking to alternative investment opportunities, and especially private market assets, to help them meet their long-term goals,” said Damon Williams, CEO of RBC GAM. “With the needs of clients in mind, we are excited to partner with BCI and QuadReal to open to investors a truly exceptional portfolio of Canadian real estate assets. Moreover, BCI’s commitment to the retention of a 50 percent interest in each asset ensures their full alignment with investors, which we believe is fundamental to the long term success of this opportunity.”
“Over many years, we have diligently acquired and developed a portfolio of premium Canadian properties on behalf of our pension and accident fund clients,” said Gordon J. Fyfe, CEO/CIO of BCI. “BCI’s real estate portfolio now exceeds $27 billion in value and as we diversify into global markets, its Canadian core will always be the foundation of our clients’ portfolio. The opportunity to partner with a like-minded, long-term focused institution such as RBC Global Asset Management is extremely compelling.”
“QuadReal is an active global real estate manager and developer for BCI and its clients, and partnerships are vital to the successful execution of our strategy,” said Dennis Lopez, CEO of QuadReal. “This includes globally diversifying our real estate portfolio. In Canada, we look forward to working side by side with RBC Global Asset Management. Fundamental to our business strategy is providing a market leading service experience for our tenants and residents and a devotion to exemplary advisory management.”
This unique opportunity is subject to the execution of definitive agreements and certain conditions including capital commitments to the strategy.
The RBC Canadian Core Real Estate Fund will initially be open to institutional and other qualified investors. RBC GAM is actively exploring opportunities to bring the Fund and related strategies to market to serve the needs of other client segments including individual accredited investors and advisors.
This information is not intended to be an offer or solicitation to buy or sell securities. The Fund is intended for qualified investors only and not to any other category of investor. The Fund will be offered by RBC Global Asset Management Inc. RBC GAM Inc. is a member of the RBC GAM group of companies and an indirect wholly owned subsidiary of Royal Bank of Canada.
Investments in alternative investment funds are speculative and involve significant risk of loss of all or a substantial amount of your investment. Investors should consult their professional advisors and consultants regarding any tax, accounting, legal or financial considerations before making a decision as to whether the fund mentioned in this material is a suitable investment for them.
First, a little background information. For a long time, I've been covering BCI's investments, I noted the Fund is way too concentrated in Canadian commercial real estate.
This goes back to the Doug Pearce days, Gordon Fyfe's predecessor, and he and I discussed this overweight Canada in commercial real estate on a few occasions. Back then, Doug was telling me BCI's liabilities are in Canadian dollars, which is true, so it made sense to only have Canadian commercial real estate and that's where the focus lied but I wasn't in full agreement.
Don't get me wrong, BCI has some great properties across Canada but even back then I was telling Doug it's too big and should diversify outside Canada in real estate just like the Caisse, OTPP, CPPIB and others.
Then Gordon came in, BCI created QuaReal in 2016 to diversify its real estate holdings internationally, but more needed to be done, and this deal was needed to diversify illiquid holdings geographically. And it's a smart partnership.
Why? Because BCI will retain a 50% stake in its Canadian real estate portfolio and other smaller Canadian pensions will be able to invest in the other 50% of the portfolio through RBC GAM's Canadian Core Real Estate Fund.
In turn, this frees up a lot of money for BCI's QuadReal to invest more internationally in various real estate sectors. And that's a more prudent approach for a pension fund the size of BCI to take.
And why would smaller Canadian pensions invest in this new partnership with RBC GAM? Why not? They'd be foolish not to as they will get access to BCI's Canadian core real estate portfolio knowing BCI still has a material stake (50%) providing them reassurance that alignment of interests are there above and beyond what RBC GAM will do to properly manage these assets.
In short, I've always maintained for a pension fund the size of BCI, they were way too concentrated in Canadian real estate and needed to diversify globally.
I believe BCI and HOOPP are the two large Canadian pensions that are the most concentrated in Canada when it comes to real estate but BCI is much larger than HOOPP (and HOOPP is expanding its European real estate holdings and is more weighted in industrial real estate).
But if you look at BCI's larger peers, their focus is definitely on international real estate.
For example, PSP Investments which Gordon used to head and is now headed by Neil Cunningham, the former head of PSP's Real Estate division, just took a bigger stake in London student housing:
As part of an ongoing joint venture, the Public Sector Pension Investment Board is purchasing a purpose-built student accommodation in London, England.Student housing is huge, it's virtually recession-proof and it's one area Canada's large pensions are focusing on but most of the best opportunities lie outside Canada.
Together with Greystar Real Estate Partners and Allianz Real Estate, the PSP is taking on the property, called Paul St. East, from Apache Capital Partners for more than $241 million. The acquisition is part of the Chapter joint venture, a real estate agreement the PSP joined in 2018 that focuses on expanding student housing options in the U.K.
London continually attracts more international students than its current rental stock can accommodate, ensuring the investment strategy benefits from high demand, noted a press release. This latest investment moves the joint venture closer to its aim of providing 10,000 beds for students in the U.K. within five years. The Paul St. East building project adds 458 bedrooms to the venture’s portfolio.
“We strongly believe Paul St. East has significant long-term potential through integrating the asset with our Chapter brand to offer students the services and experiential living enjoyed at Greystar’s other Chapter residences,” said Troy Tomasik, Greystar’s managing director of investments in the U.K. and Ireland.
I've written about the Canadian student housing market, it's growing and is interesting but it's small fries for these huge funds like CPPIB and GIC which invested big in US college housing.
For its part, the Caisse just announced it's financing a Chinese institutional apartment operator:
The Caisse de dépôt et placement du Québec has led a series D financing totalling US$150 million for Mofang Apartments, an institutional rental company based in Shanghai, China.You can read the Caisse's press release here. Again, just like PSP, CPPIB and others, it's partnering up with the right outfit in China to do this deal and since that is where long-term growth lies, it makes sense over the long run to strike more real estate deals in China and elsewhere in Asia.
“As a long-term investor, [the Caisse] seeks to be a constructive shareholder, working together with the management and partners to build good companies,” said Meng Ann Lim, head of private equity for Asia Pacific at the Caisse, in a press release.
As a Chinese domestic institutional rental company, Mofang is present in 20 of the country’s urban centres.
“This latest round of financing enables Mofang to augment the brand’s market presence, extend its operational capabilities, enhance the IT system and loyalty programme, pursue [mergers and acquisitions] and further expand the franchise business,” said Kitty Liu, chief executive officer of Mofang.
All these are examples of why I think BCI did the right move with this $7 billion partnership because in essence, it's playing catch up to its larger peers which are a lot more diversified in commercial real estate across the world, especially in the US.
In other real estate news, OPTrust is partnering with several investment firms to buy three buildings in the downtown Toronto financial district:
The properties are anchored to the Dynamic Funds Tower, the OPTrust’s current corporate headquarters. The other investors include the Great-West Life Real Estate Fund, the London Life Real Estate Fund and I.G. Investment Management Ltd. as trustee for Investors Real Property Fund.Indeed, a LEED Gold certified office tower in downtown Toronto's financial district is a high-quality asset and nowadays everyone wants LEED Gold or even better, LEED Platinum certification like HOOPP's One York Street.
“As a pension management organization, it’s critical we find income-generating assets that align with our members’ requirements of providing plan sustainability and security,” said Rob Douglas, managing director of real estate investments at OPTrust, in a press release. “With strong demand and historic low vacancy rates for Toronto office space and the shared interest of trusted strategic partners, this property presented a unique and valuable opportunity to invest in a high-profile property in the heart of Toronto’s downtown core.”
The Dynamic Funds Tower is a 30-storey LEED Gold certified office tower. The other two buildings are a nine-storey boutique office building and a three-storey retail space.
“In today’s competitive market where there are limited opportunities to acquire Class A office buildings in core markets, we’re pleased to have completed this transaction,” said Ralf Dost, president of GWL Realty Advisors, which will be managing the buildings. “This acquisition adds another high-quality asset to our clients’ real estate investment portfolio and fits within our downtown strategy.”
Previously, the Canada Pension Plan Investment Board and Oxford Properties Group, the real estate investment arm of the Ontario Municipal Employees Retirement System, co-owned the properties.
Lastly, since I am talking about investing in commercial real estate outside of Canada, take the time to read how Oxford Properties Group, the real estate subsidiary of OMERS, made a risky bet on an uninspiring rail yard in the Far West Side of Manhattan that has paid off handsomely, and it’s just getting started in New York and other gateway cities:
Oxford Properties Group, the real estate arm of the Omers pension fund for retired police officers and city clerks in Ontario, teamed up with Related on the risky Hudson Yards project in 2010, in the midst of the real estate crash. Related’s previously partner Goldman Sachs had just changed its focus from long-term plays and backed out.Now that's a great real estate bet, one that you can read a lot more about here. Let me just quote this passage:
“Those did not feel like cheap decisions. They all felt like we were paying too much and maybe the world was ending,” Oxford president Michael Turner told Bloomberg. “We happened to be able to be there as a sponsor of quality, with fortitude and a balance sheet to make a decision.”
Jay Cross, Related’s president of Hudson Yards, is a Canadian who knew Oxford’s former president Blake Hutcheson. He worked with Cross on the deal, in which Oxford and Related are 50-50 partners on the general group that oversees the entire development.
Last year, Omers reported returns of 8.7 percent on real estate investments. The Hudson Yards project is part of the Oxford’s push to become an increasingly global presence, Bloomberg reported.
A decade ago, Omers had 96 percent of its assets in Canada. Now, more than 55 percent is invested abroad, with total assets approaching $45 billion. Oxford is looking to boost its exposure in the industrial and multi-family space — and it’s targeting cities that attract technology and talent like New York, London, Sydney and Toronto.
Last year, Oxford bought the southern portion of St. John’s Terminal in Manhattan for $700 million and is planning a 1.3 million-square-foot office to be anchored by Google.
They’re not the only ones looking to reap greater returns by looking outside Canada. For the past five years, publicly recorded commercial real estate investments abroad by Canadian pension funds was $84.6 billion, compared with $19.8 billion invested domestically, according to CBRE research. Ivanhoe Cambridge Inc., a unit of Caisse de Depot et Placement du Quebec, bought IDI Logistics in the U.S. in a US$3.5 billion deal last year and has recruited Oxford as a partner.So, the next time anyone asks you why BCI entered into this partnership to effectively open up half its Canadian real estate portfolio to smaller pensions and diversify its real estate holdings internationally, please refer them to this comment. It's simply a prudent and responsible long-term portfolio move.
One last note, yesterday after the CFA luncheon where Pierre Boivin and Peter Letko shared their views on resilience, a Greek money manager I know saw me and pulled me aside at the end and somewhat concerned, he asked me: "How did the Caisse manage to gain 4.2% last year?".
I asked him what's the problem? He said the problem is he was down 1% last year and his clients are wondering how come the Caisse managed to gain 4%.
I said "unlike you and other smaller funds, the Caisse and other large Canadian pensions are invested across public and private markets all over the world" and that allows them to smooth their returns when public markets are getting whacked on any given year.
So he started: "I knew it, they're fudging their numbers, these private markets are all marked to myth/ model, blah, blah, blah!".
I said, "no, that's not true because over the long run, diversifying into private markets and doing it intelligently through more co-investments to lower fees has proven to be the winning strategy to add significant value over public market benchmarks over a five or ten-year period."
I added: "You simply can't argue with the success of the Canadian model over the long run and remember, these pensions have long-dated liabilities, they don't care about one or three years, they have a long investment horizon and are mostly compensated on value added over a long period.
Anyway, it irks me how some very smart people who are CFAs don't get private markets, they think it's all accounting gimmicks. Sure, there are some years where pension funds mark assets down or up but again, it's the long-term performance that counts.
I just wanted to get that off my chest because public markets are tough, very tough to add value, which is why I believe the public versus private markets battle will continue and the latter will gain over the former.
On that note, it was interesting to see today how Brookfield Asset Management agreed to buy a majority stake in Howard Marks's Oaktree Capital, a combination that would create one of the world’s largest alternative money managers. Brookfield is incredibly impressive and this says it all:
Shares of Brookfield have been a stellar performer for decades, posting a 21 percent annual return since 2009, double the gain of the S&P/TSX Composite Index, Canada’s main equity gauge.Below, founded in 2016 and headquartered in Vancouver, Canada, QuadReal Property Group is a commercial real estate group aiming to double the value of its real estate portfolio in the next five years. Watch this video to hear how IBM Analytics is helping QuadReal’s decision-makers get timely, accurate insight into portfolio data scattered across many disparate source systems to meet their business objectives.
Second, Bruce Flatt, CEO of Brookfield Asset Management, discusses 2018 and what he sees lies ahead. Very smart man, listen carefully to what he says.
And CNBC's David Faber reports that Brookfield Asset Management will buy a 62 percent stake in Oaktree Capital. BN's Vincent Bielski also reports on this deal on "Bloomberg Markets." Look out Blackstone, Brookfield just took a giant leap forward and will become the next alternatives juggernaut.
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